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At the turn of the year the plan was simple. As sales and trading market revenues tailed off, bankers would line up swathes of mergers and acquisitions advisory mandates and equity financings.

The first part has happened. Trading revenues have fallen from what were widely seen as unsustainable highs. Downward momentum was evident between the first and second quarters.

Last week, Merrill Lynch revealed that revenues from sales and trading in the second quarter were 22% lower than in the first quarter. Stan O’Neal, chairman and chief executive, described the second quarter as having a “progressively more challenging business environment”.

Merrill admitted its sale and trading business had been hit by a “sharp decline in capital markets activity levels and volatility in June amid rising interest rates and geopolitical uncertainties”. Its results, together with those from Bear Stearns, Goldman Sachs, Lehman Brothers and Morgan Stanley, mean that Wall Street banks have reported a collective $1.5bn (€1.2bn) fall in their second-quarter sales and trading revenues.

While investment banking revenues have picked up, the increase does not come close to replacing the shortfall. Turnover from underwriting and M&A advisory at the five banks has increased by $395m, leaving a net deficit of more than $1bn.

Debt capital markets business has not come to the rescue. Issuance from corporates in Europe and the US has tailed off in the first half – an expected trend as companies did such debt financing in 2002 and 2003. New-issue volumes were down on last year in every debt category save European high yield – a niche market with a history of lumpy dealflow.

M&A markets have remained nervous after a bumper start to the year. The collapse last week of Philip Green’s £9.1bn attempt to buy Marks & Spencer has robbed the market of a large chunk of advisory and capital markets fee income.

Equity capital markets have had a strong six months but momentum has eased in the closing weeks of the second quarter. In Europe, equity issuance fell 13% from the first quarter and in the US it fell 36%.

Completed M&A rose sharply in the US during the second quarter. Elsewhere, numbers paint a picture of slowing momentum after a good start to the year. Announced M&A fell on both sides of the Atlantic in the second quarter. So did equity issuance.

Worse, as the second half gets under way there is a growing sense that investment banking is set to stall for the rest of the year – and that sales and trading revenues will continue to fall away. Driving this fear is an uncertain macroeconomic background.

Credit Suisse Asset Management forecasts US growth to level out at 3.5% as interest rates rise. Eurozone growth will be about 1.5%. Bob Parker, vice-chairman of CSAM, said: “The overall picture is of strong Asian growth, while Europe struggles and US growth is moderate. We do not expect a Chinese hard landing but for growth this year to be 7.5% to 8%.”

Jeremy Sigee, securities industry analyst at Citigroup in London, said: “The challenge for banks is the risk of more negative than positive influences in the coming six months – seasonal earnings slowdown, more rate rises, more macro uncertainty – before positive views on revenues can be proven or disproven in the first half of 2005.”